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FOMC Minutes: Three Frustrating Fed Fears Fail To Fade

By Kurt Osterberg · On August 22, 2018

Last month, the Federal Reserve changed a grand total of about twelve words in its most recent monetary policy statement (see “FOMC recap: Powell’s snoozer leaves traders looking ahead to BOE and NFP” for more), so traders were understandably unexcited for the release of today’s FOMC minutes. Layer on an imminent monetary policy update from Fed Chair Powell to kick off the Jackson Hole Summit on Friday and expectations for any market-moving headlines were extremely low.

While the release has hardly been earth-shattering, there were at least some insightful tidbits for traders to mull over (emphasis mine):

MANY FED OFFICIALS SAW ANOTHER HIKE LIKELY APPROPRIATE `SOON’

FURTHER GRADUAL INCREASES IN INTEREST RATES CONSISTENT WITH SUSTAINED EXPANSION

FED SAW TRADE, HOUSING, EMERGING MARKETS AS DOWNSIDE RISKS

TRADE POLICIES COULD HAVE SIGNIFICANT NEGATIVE EFFECTS ON GROWTH

SOME FED OFFICIALS SAW STRONG ECONOMIC MOMENTUM AS UPSIDE RISK

SEVERAL OFFICIALS CITED EVIDENCE THAT YIELD CURVE INVERSIONS OFTEN PRECEDE RECESSIONS

The headlines about another rate hike coming “soon” and “further gradual increases” were already completely priced into the market, with market-implied odds of a September rate hike exceeding 90% heading into the meeting. As a result, traders were far more interested in the “downside risks” of trade, housing, and emerging markets that the central bank cited.

Astute readers will note that since the FOMC met in late July, we’ve seen no meaningful sign of a thaw in US-China trade relations, another raft of weaker-than-expected housing data, and the complete collapse of the Turkish lira, a key emerging market currency; in other words, all three “downside risks” identified by the FOMC have deteriorated over the last three weeks, and that’s without even mentioning the continued flattening of the yield curve, which several policymakers also expressed concern about.